Business leaders have sent a warning to Gordon Brown and the Bank of England as new data illustrates an entrenched slowdown in UK economic growth. The British Chambers of Commerce's (BCC) latest quarterly survey shows wobbling output across manufacturing and services industries, while business confidence has taken a tumble. Of particular concern, said the group, was the recent performance of the service sector, which is responsible for around two-thirds of UK output yet has seen steep a decline in output. The latest data shows that domestic balances were weak in the last three months after staging only a mild comeback from sharp losses reported in the second quarter of the year. “The steady fall in the critical confidence balances this year, for both manufacturing and services, is extremely worrying and requires an urgent policy response,” said BCC director general David Frost. “With the economy slowing sharply, and the business environment becoming more dangerous, it is important for the Monetary Policy Committee to keep interest rates at the lowest level consistent with the inflation target in the medium term.” But economists believe that a hoped-for cut in interest rates could be a long time in the offing, as the MPC tries to balance its dual role of controlling inflation and encouraging economic growth. It all could spell trouble for Gordon Brown, the UK chancellor, who pinned his tax and spending policies on a much higher growth rate than is now expected for the year. Brown is hoping for 3% growth, while the BCC says 1.6% may be a more realistic figure.

The problem could lead to either spending cuts, or tax rises – dreaded by businesses – in next year's Budget.